Singapore Company Focus

StarHub Bloomberg: STH SP

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Refer to important disclosures at the end of this report

Reuters: STAR.SI

DBS Group Research . Equity

6 Aug 2015

FULLY VALUED

Slight miss due to handset subsidies

Last Traded Price: S$3.75 (STI : 3,191.39) Price Target : S$3.70 (-1% downside) Reason for Report : Quarterly results Potential Catalyst: Quarterly dividends Where we differ: In line

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2Q15 net profit of S$99m (+5% y-o-y, +34% q-o-q) was slightly below consensus expectations of S$103m as 1H15 profit of S$172.8m declined 6%

Analyst Sachin MITTAL +65 6682 3699 [email protected]

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Handset subsidy costs were higher than expectations due to iPhone 6's popularity

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Maintain Fully Valued with unchanged TP of S$3.70

Result Summary FY Dec (S$ m) P&L Items Turnover Gross Profit Opg Profit EBITDA Net Profit Other Data Gross Margin (%) Opg Margin (%) Net Margin (%)

2Q 2015

2Q 2014

1Q 2015

% chg yoy

% chg qoq

589.5 185.3 124.5 194.6 99.1

576.4 182.1 118.7 187.4 94.3

617.9 151.3 93.9 162.0 73.7

2.3 1.8 4.9 3.8 5.1

(4.6) 22.5 32.6 20.1 34.5

31.4 21.1 16.8

31.6 20.6 16.4

24.5 15.2 11.9

Financial Summary FY Dec (S$ m) Turnover Operating Profit EBITDA Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) At A Glance

2014A 2,387 477 748 370 21.5 21.5 (3) (3) 20.0 8.7 17.4 17.4 9.2 5.3 43.3 2.8 319.8

2015F 2,407 474 759 369 21.4 21.4 0 0 20.0 10.1 17.5 17.5 9.1 5.3 37.2 2.5 228.7

Issued Capital (m shrs) Mkt. Cap (S$m/US$m) 3m Avg. Daily Val (US$m)

2016F 2,431 468 768 364 21.2 21.2 (1) (1) 19.9 11.2 17.7 17.7 8.9 5.3 33.4 2.1 198.7

1,728 6,480 / 4,692 6.5

ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: StarHub is the second largest of the three

telecom operators in Singapore. StarHub provides mobile services, pay TV, fixed broadband and fixed voice services, popularly known as quadruple play services. Source: Company, DBS Bank, Bloomberg Finance L.P.

www.dbsvickers.com ed: TH / sa: JC

2017F 2,454 466 780 362 21.1 21.1 0 0 19.9 12.3 17.8 17.8 8.8 5.3 30.4 1.7 178.7

Highlights Higher handset subsidies the key reason. Sale of equipment stood at S$35.2m versus S$24.7m in 2Q14, however cost of equipment stood at S$90.7m versus S$70.8m in 2Q15, indicating almost S$10m more in handset subsidies. Mobile revenues were flat on an annual basis. Overall mobile revenue stood at S$310.8m (+0.2% y-o-y, +1.8% q-o-q). Postpaid revenues improved sequentially from improvement in postpaid ARPU to S$70 from S$68 possibly as StarHub sold many iPhones in 1Q15. About 63% of subscribers were on tiered plans and 22% of them exceeded the data-caps. On a positive note, broadband business has stabilised. Broadband revenue rose 1.8% q-o-q to S$49m, the second quarter of sequential improvement. Broadband ARPU was stable sequentially at S$33. Outlook Cable TV is stable now but challenges in the long term cannot be ruled out. We expect over-the-top (OTT) content providers such as Netflix to target Singapore market sooner or later. StarHub believes that it can collaborate with such OTT players to provide them the reach via its set-top boxes while subscribers do not have to remember separate user IDs and passwords. Overall, we think that cable TV revenue could face pressure in the long term as channels also go the OTT route and consumers can pay for just selected channels instead of the whole bundle. We expect StarHub to react to aggressive mobile offers by M1. In last week of July, M1 launched a new SIM-only plan at S$30 a month for a 5GB data bundle, 300 minutes of talktime and 1,000 SMS and MMS. Consumers need to sign a one-year contract. StarHub currently offers a similar 5GB plan at S$66.32 which could be possibly be reduced, in our view. Potential 4th player could pose a threat in mobile business. 4G spectrum auction, expected in 1Q16, could result in a 4th mobile player entering the market in 1H17. This is likely to challenge pricing levels and erode market share for existing players. We estimate that StarHub could lose 4% of its revenue (versus 10% revenue share loss for M1) to the new player by 2022.

Company Focus StarHub

Valuation: We use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$3.70.

Key Risks: Decline in mobile roaming. A potential decline in mobile roaming and broadband margins are the key downside risks to our estimates.

Target Price & Ratings History S$ 4.56

3

4.16

1

2

3.96

4 3.76 3.56 Aug-14

Dec-14

Apr-15

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank

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1

Cl o s i n g Ta rg e t Pri c e Pri c e 06 Aug 14 4.18 4.30

2

06 Nov 14

4.16

4.30

Hold

3

26 Feb 15

4.31

4.35

Hold

4

27 Jul 15

3.94

3.70

Fully Valued

S.No .

4.36

Da te

R a ti n g Hold

Company Focus StarHub

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) (b)

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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary position in StarHub recommended in this report as of 30 Jun 2015. 2.

DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 30 Jun 2015.

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.

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Company Focus StarHub

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. 4.

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Starhub as of 28 Feb 2015. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 28 Feb 2015.

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